New York Markets After Hours

Videogame stocks on roll, despite weak data

Analysts point to chatter about new consoles, weak valuations

By

DanGallagher

SAN FRANCISCO (MarketWatch) — For those who haven’t been watching, videogame stocks have seen a surge in investor interest over the past few months despite data showing continued weak retail sales of games and equipment.

Ubisoft Entertainment

Ubisoft’s “Assassins Creed III” has been a big hit this holiday season, and has helped the game publisher’s shares mount a strong run-up over the past few months.

Key stocks in the sector have seen their market values surge since early August. Game publishers Electronic Arts Inc.
EA, -1.10%
, Take-Two Interactive Software Inc.
TTWO, +0.97%
and Ubisoft
UBI, -1.55%
have all seen their shares jump by 40% or more in that time frame. Retailer GameStop Corp.
GME, +0.72%
has surged by 75% in that period.

By comparison, the S&P 500 has added roughly 3% in the same period, with the Nasdaq up less than 2%.

According to analysts, there are a combination of factors driving the recent run-up. One is ultralow valuations; EA, for instance, was trading at less than 10 times forward earnings before its fiscal first-quarter earnings report on July 31 — the lowest multiple for the stock in at least 10 years, according to data from FactSet. GameStop also hit a record low multiple around that time.

“There have been multiple catalysts. But the first one is definitely that they are cheap,” said Ed Williams of BMO Capital in an interview, who added that game stocks “have been unloved for some time.”

The sector has been unloved mostly because of dreary retail sales data. By the end of July, total videogame retail sales in the U.S. were down 27% compared with the same period the previous year, according to NPD data. The downtrend has continued, with every month showing double-digit sales declines, including November despite several big game launches during the month. See: Videogame sales fall despite big releases.

But another factor contributing to the run-up is growing speculation about new game consoles expected to start hitting late next year. Investors are widely betting on a new Xbox console from Microsoft
MSFT, -0.74%
by next fall, and possibly a refreshed PlayStation from Sony
SNE, -1.14%6758, -0.64%
as well.

“All these stocks tend to outperform ahead of a new console cycle,” said Doug Creutz of Cowen & Co.

Nintendo
NTDOY, -2.59%7974, -1.86%
got a jump on the other console makers with the launch of the Wii U last month, which Creutz believes has helped GameStop in particular, given that the retailer got a major allotment of the new consoles for the Nov. 18 launch.

Nintendo’s own shares remain in a slump — down more than 20% for the year and roughly flat from its early-August price — as investors worry about the company’s future with its large base of casual gamers that are flocking to free and cheap gaming options on smartphones and tablets.

Stronger game sales in the holiday season may also be contributing to the rise. Ubisoft in particular has benefited from a strong reception for “Assassin’s Creed III,” the latest update to the popular franchise that sold more than 7 million units in its first month, the company disclosed on Wednesday.

New Google map app for iPhone

(3:07)

Three months after the Google Maps mobile app was kicked off the iPhone in favor of Apple's much-criticized mapping software, Google has released a downloadable version of the app through Apple's app store. WSJ's Ben Rooney reports.

EA and Take-Two also have some big releases coming up in early 2013. For EA, games such as “Dead Space 3” and “Crysis 3” are expected to be big sellers. And Take-Two has “Grand Theft Auto V” in the pipeline for a spring release.

“We believe GTA V can approach Modern Warfare 3’s record as the biggest entertainment launch,” wrote Michael Olson of Piper Jaffray in a note to clients on Wednesday, in which he upgraded Take-Two to an overweight rating.

The one notable game stock that has missed out on the run is Activision Blizzard
ATVI, -1.28%
, which remains roughly flat from its early August level. Williams of BMO said Activision tends to move mostly on two main game properties — “Call of Duty” and “World of Warcraft” — and has been hurt in part on growing chatter that the recent “Black Ops 2” release is underperforming the previous “Modern Warfare 3” iteration of COD.

“The macro issues that can move EA, Take-Two and GameStop are less relevant to Activision because the company is so closely tied to that handful of game properties,” Williams said, adding that the question of what Vivendi might do with its ownership stake in the game publisher also creates an “overhang” on the shares.

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